With Greece on the edge and Argentina confronting adverse legal decisions, thinking about sovereign default is a front-burner issue. This column discusses how recent experience casts light on relative merits of the two main conceptual approaches to modelling sovereign lending and default – the reputation approach and the punishment approach.
Jeremy Bulow, Kenneth Rogoff, 10 June 2015
Sebastian Edwards, 04 March 2015
There were 24 sovereign defaults and debt restructurings between 1997 and 2013. Using data on 180 debt restructurings – for both sovereign bonds and sovereign syndicated bank loans – this column argues that the roughly 75% ‘haircut’ Argentina imposed on its creditors in 2005 was an outlier. Greece’s ‘haircut’ of roughly 64% in 2012, by contrast, was in line with previous experience.
Irina Balteanu, Aitor Erce, 12 November 2014
The feedback loop between banking crises and sovereign debt crises has been at the heart of recent problems in the Eurozone. This column presents stylised facts on the mechanisms through which banking and sovereign crises combine and become ‘twin’ crises. The results point to systematic differences not only between ‘single’ and ‘twin’ crises, but also between different types of ‘twin’ episodes. The timing of ‘twin’ crises – which crisis comes first – is important for understanding their drivers, transmission channels, and economic consequences.
Olivier Blanchard, 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Nicola Gennaioli, Alberto Martin, Stefano Rossi, 19 July 2014
There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.
Charles Wyplosz, 26 November 2012
For the euro to survive, the recession must be halted without piling on more debt. This column argues that the unpalatable conclusion is that public debts must be written down. The massive moral hazard problem this will cause must be dealt with by making sure that public debts will never again be allowed to grow to unsustainable levels. To this end, decentralised US-style fiscal discipline is needed.
Caroline Van Rijckeghem, Beatrice Weder di Mauro, 25 September 2012
Lessons from the past suggest democracies with strong economic fundamentals do not default on their debt. This column suggests high growth and low deficits are key but that growing discontent as the result of austerity may be the most important factor yet in influencing the probability of default. Eurozone countries, therefore, need to build a higher safety buffer of good fundamentals to ensure safety from default.
Mark Mink, 23 February 2012
Since 2010, Eurozone countries have engaged in unprecedented rescue operations to avoid contagion from a potential Greek sovereign default. This column argues that news about Greek public finances does not affect Eurozone bank stock prices, while news about a Greek bailout does. This suggests that markets consider news about a Greek bailout to be a signal of Eurozone countries’ willingness to use public funds to combat the financial crisis.
Charles Wyplosz, 25 October 2011
UPDATED: EZ leaders are working on a plan to save the euro. This column updates the column posted on 22 August 2011 by evaluating the steps EZ leaders took this weekend. Things don’t look good. By rejecting any major role for the ECB, leaders have guaranteed that any package will be too little too late. After all, imagine what the US crisis package in 2008 would have looked like if the Fed had refused to use its massive firepower to stabilise markets.
Willem Buiter, Ebrahim Rahbari, 12 October 2010
CEPR Policy Insight No.51 explains how and why the fiscal crisis in the Eurozone came about and how it is likely to evolve during the rest of this decade.
The Editors, 12 October 2010
The saga of Greece’s public finances continues, and it is not the only country whose fiscal sustainability is in doubt. This column introduces a new Policy Insight by Willem Buiter and Ebrahim Rahbari that analyses the sovereign debt crisis in the Eurozone and the response of the national authorities, EU institutions, and IMF.
Fabio Panetta, Giuseppe Grande, 07 August 2010
The spectre of sovereign default looming over the world economy represents a major threat to economic stability. This column argues that, even without a fully-fledged debt crisis, the deterioration of public finances in major countries could trigger an increase in long-term interest rates and jeopardise the recovery.
Ugo Panizza, Eduardo Borensztein, 06 May 2010
For the last 50 years sovereign defaults only concerned developing countries. The recent predicaments of Greece have raised the spectre of a default in a high-income country. This column argues exchange-rate depreciation has helped shrink the costs of default and spur economic recovery in past episodes. As part of the Eurozone, Greece may pay a steep cost if it were to default.
Daniel Gros, Thomas Mayer, 15 March 2010
Europe was caught totally unprepared for the pressure on public debt that followed the global crisis. This column outlines a proposal for a European Monetary Fund with which, it argues, the EU would be much better prepared to face these difficult times.